The Supreme Court has agreed to hear a case challenging the constitutionality of the Public Company Accounting Oversight Board.

The plaintiffs, the Competitive Enterprise Institute, the Free Enterprise Fund, and a small auditing firm, Beckstead & Watts, have lost in lower court decisions, although there was a 5-4 split among the justices on the U.S. Court of Appeals for the D.C. Circuit (see Group Appeals PCAOB Case to Supreme Court).

The plaintiffs originally filed suit in 2006 after PCAOB audit inspectors faulted Beckstead & Watts in a 2004 report. Beckstead protested that the expense of Sarbanes-Oxley rules favors large firms and public companies over smaller ones. The plaintiffs sued on the ground that the way PCAOB members are appointed by the SEC violates the Constitution, which gives the president the power to make appointments with the consent of the Senate.

“The Founding Fathers wanted powerful government officials to be vetted by the president and the Senate, to help ensure agencies remain accountable to elected officials and ultimately the American people,” said CEI general counsel Sam Kazman in a statement. “The PCAOB imposes massive regulatory burdens on public companies, under threat of criminal and civil penalties, yet the regulators are unaccountable to the people, the president or the Senate.”

”The PCAOB has been very bad for the economy,” added CEI attorney Hans Bader. “The biggest beneficiaries of the law have been the big accounting firms that failed to warn the public about Enron and similar scandals, which are charging record fees to help businesses comply with the mountain of red tape created by the PCAOB.”

“We remain confident that the PCAOB’s structure is constitutional and look forward to an opportunity to demonstrate that in the Supreme Court,” said a PCAOB spokesperson.

The plaintiffs contend that the PCAOB’s interpretation of Section 404 of the Sarbanes-Oxley Act has cost public companies more than $35 billion a year and proven especially burdensome to smaller public companies. They cite a Brookings-AEI study that says the 404 rules, which govern the audit of internal controls, have cost the economy as a whole over a trillion dollars. Bipartisan critics have observed that the PCAOB standards have burdened firms with minutiae, while overlooking many of the practices that led to the subprime shenanigans, the plaintiffs contend.

“The decision by the Supreme Court to hear the case is good news for American investors and prospects for economic recovery, since a victory in this case will give the president an added incentive and ability to adopt policies that foster economic growth,” said Bader.

The plaintiffs argue that if the president can pick and remove the PCAOB members, as the Appointments Clause requires, he would be blamed for any of their policy failures, and thus have an interest in making them develop sound policies that protect investors and don’t stifle economic growth. He would not be able to blame the red tape on an unaccountable agency whose officials he doesn’t select or control.

However, the administration has opposed the lawsuit, and Solicitor General Elena Kagan filed a brief in support of the PCAOB, arguing that the SEC effectively controls the board. “The commission enjoys comprehensive control over every aspect of the board and its activities,” said the brief. “Every rule and ethical standard issued by the board, including rules governing the initiation and conduct of board investigations, must be approved in advance by the commission.”

The plaintiffs contend that giving the president more of a role in the PCAOB promotes even-handed application of the law. A bureaucrat is less likely to abuse individual citizens if he knows he is accountable to their elected representative, the president, they argue. CEI is acting as co-counsel in the case, and Michael Carvin of Jones Day is the lead attorney.

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